Analytics, Energy & Resource Innovation

According to a recent report by Pew Charitable Trusts¹, China invested almost $35 billion in clean energy in 2009, just about double the U.S. total of $18.6 billion. Remarkably, China’s total in 2004 was just $2.5 billion.

Cleantech investing continues to recover at faster pace. All of the news services, including VentureSource, Bloomberg New Energy Finance, and Cleantech Network, report consistently strengthening investment activity through the second quarter of 2010.

On April 8-9, 2010, Silicon Valley Bank broughttogether 104 experts from the entrepreneurial, venture capital, energy,academic and policy worlds to discuss critical issues affecting the long termgrowth of the energy generation, storage and efficiency markets.Here are our key takeaways from this set ofinvigorating, closed door discussions.

The last year has seen a wave of investment and utility interest in home and business energy intelligence tools. Power providers and companies that supply infrastructure envision a smart grid that will provide significant improvements over the current utility distribution grid. Targeted improvements include automated meter reading, faster outage detection and repair, demand response tools to reduce energy usage during peak usage times, and load shifting capabilities to distribute power to high demand areas in real time.

The magnitude of opportunities in global energy markets is enormous, but scaling up a new technology to “utility” scale also presents unique challenges for the venture model. The leap from initial product demonstration and small scale manufacturing into production or assets in the hundreds of megawatts (and hundreds of millions of dollars) largely exceeds the capacity of venture equity financing. Given the current state of capital markets, start-ups are wondering what sources of lending are available for initial large scale manufacturing or projects and what role can and should government play (for example, through loan guarantees and grants) in “picking winners” and lowering the hurdle for new clean energy technologies to attract commercial capital and gain traction in the market.

Much has been made of the potential role of emerging cleantech markets in driving the economic recovery and renewing U.S. leadership in technology innovation. The mobilization and retraining of displaced workers for jobs in the new “green collar” workforce was a primary motivation behind federal stimulus funding for energy efficiency, renewable energy and smart grid. Yet, among cleantech venture capitalists and entrepreneurs in Silicon Valley, there is a decided ambivalence about the role of the sector in creating national competitive advantage. Indeed, the very notion of national competitiveness can take on divergent overtones in a world where capital from all over the world, flowing through investors in Silicon Valley, supports companies based around the world, with networks of manufacturing, supply chain, and markets located wherever economic logic may dictate. As one VC in our discussion put it, “Global markets are great if you’re an entrepreneur or investor, but I have to put on my nationalistic hat” for discussions about competitiveness. In short, capitalism and economic nationalism make strange bedfellows in today’s globally interconnected economy. ­

The increasing integration of intermittent renewable energy sources such as wind and solar onto the grid has the potential to negatively impact overall electric reliability. Utilities and regulators at the state and federal level have promoted a number of pilots to explore new grid storage technologies, including flow batteries, compressed air energy storage, and flywheels. However, the benefits to the grid straddle jurisdictional boundaries between generation, transmission, and distribution. How should storage be paid for and by whom? What will be the public reaction in terms of siting, permitting, and local NIMBY resistance? How big a role can storage ultimately play in achieving renewable energy mandates, such as California’s 2020 RPS?

The U.S. has subsidized rooftop solar PV primarily through a combination of federal tax incentives and utility-administered programs. At the same time, Germany, Japan, and Spain have all achieved explosive growth in their renewable energy markets in recent years through Feed-in Tariffs (FiTs), where a government policy directly sets the subsidy price to eligible consumers. Many are now advocating that the FiT model should be applied in the U.S. Others are questioning what impact it would have in the market and whether the structure of incentives leads to different technology choices by consumers.

Cleantech is a new sector that lacks a history of serial entrepreneurship and experienced angel investors that can help coach and fund young companies. With insufficient private capital going to seed funding in the current market, young companies are seeking strategies to get them to the point of venture readiness. Challenges and opportunities for commercializing promising new energy technologies may be hiding in government, corporate and academic research labs. In addition, public sector may play an important role in innovation beyond funding of basic research — through ARPA-E and stimulus programs — and in filling the funding gap for cleantech start-ups at the earliest seed stage.